Warning to UK and France on derivatives

Rivalry between Paris and London could jeopardise Europe's competitiveness in the vast "over-the-counter" derivatives markets, France's stock market regulator has warned.

Jean-Pierre Jouyet, chairman of the Autorite des Marches Financiers, the French regulator, told the FT that disagreement between the two countries over how to regulate trading in these complex products could hinder a European solution and drive business to the US.

"In the US they have seen the threat. They are creating centralised clearing houses. But in Europe we are not there because there is disagreement between Paris, London and Frankfurt," he said. London had "to accept that Paris has a role" in clearing trades in euro-denominated derivatives, while Frankfurt was more neutral in the debate.

"If Europe cannot agree and falls behind, trading will be done with the clearing system of the US. Because they have the technology, they have the savoir faire, and they will have the regulation. Europe has to know what it wants."

This month the European Commission called for more standardisation in the OTC markets and increased use of clearing houses, which is under way in the US.

A clearing house steps in when a party to a trade defaults, ensuring that a transaction is completed. Most OTC trades are not cleared, exposing firms – and the financial system – to so-called "counterparty risk" such as default.

Europe wants to establish clearing for OTC credit derivatives, with Eurex Clearing, owned by Deutsche Borse, and Ice, the US futures exchange, nearing launch by a July 30 deadline set by the EC.

Additional reporting by Jeremy Grant in London

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